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China seeks "more active" use of forex reserves

(Xinhua)
Updated: 2009-02-17 19:44

The power of China's huge foreign exchange reserves, which stand at nearly $2 trillion, might start to be felt more around the world as the country seeks to use those funds "more actively" as the global economic crisis grinds on, experts said.

Special Coverage: Coping with Financial Crisis Related readings:  China may use forex reserves to help oil firms  Growth rate of forex reserve falls

"The government has sent clear signals," said Yin Jianfeng, deputy director of the Institute of Finance and Banking of the Chinese Academy of Social Sciences, a government think tank.

He said Beijing was likely to shift its strategy from passive to active reserve management, a change he said was especially urgent and an obvious response to the financial crisis.

Premier Wen Jiabao said in an interview with the Financial Times during the Davos forum that the country was exploring more efficient ways to use its reserves to boost domestic development.

China's reserves hit a record $1.95 trillion at the end of 2008, the largest in the world and far exceeding those of Japan, the second-largest foreign exchange holder with $1.03 trillion.

To play it safe, China's huge reserves have usually been invested in low-risk but low-yield assets, such as US government bonds.

According to the US Treasury, China held $681.9 billion worth of US government bonds as of November.

China should find new ways to use these funds more efficiently, get a higher return and support domestic development, said Yin.

The government has long sought to diversify the use of its reserves as part of a larger reform drive.

"We hope to use the money to buy equipment and technology, which are urgently needed for the country's development," Wen told the Financial Times.

Forex reserves must be spent on foreign trade and overseas investment, he said.

GOOD POSITION

Massive reserves have put China in a good position to increase imports to meet domestic demand, said Yin, and this was very likely to be a major way to effectively use the money.

Imports fell for the four months ended in January, often faster than exports declined, as global trade shrank amid the economic and financial crisis. The reserves could be used to reverse that trend.

China's imports and foreign investment have been limited to date, to some extent, by restrictions imposed by other countries. However, the crisis has prompted some nations with much-needed technology to ease those restrictions.

The United States and China signed an agreement on Jan 13 that allows US exporters to sell certain dual-use items to China without acquiring permission from the government. Dual-use refers to products that can have either civilian or military uses.

Wen also revealed during his trip to Europe last month that China would send a delegation there to procure advanced equipment and technology.

BOOST TO WORLD

Importing more advanced equipment and technology would boost China's domestic investment and provide effective economic stimulus, said Zuo Xiaolei, chief economist of China Galaxy Securities Co Ltd.

"China's increase of imports will surely contribute to the economy of the exporters and thus help the world economy recover," Zuo said.

She warned that it would be dangerous either to use the reserves for budgeted spending or subsidies to boost consumer spending. Either use could fuel inflation or a depreciation of the yuan.

Zhao Xijun, deputy director of the Institute of Finance and Securities at Renmin University, said China had other choices. Apart from purchasing crucial technology, equipment and resources, it could also make direct investments through commercial banks or support State-owned enterprises' overseas acquisitions.

For example, Aluminum Corp of China, or Chinalco, announced on Feb 12 it would invest $19.5 billion in mining giant Rio Tinto Group, bailing out the latter while securing for the state-owned Chinese company access to more resources. This deal would be by far the largest overseas investment by a Chinese company.

"To buy more strategic assets, energy and resources would also be a very important way to efficiently use the reserves. It would help preserve and enhance the value of the reserves," Zhao said.

NEW DESTINATIONS

Zhou Xiaochuan, governor of China's central bank, the People's Bank of China, has also said that China should consider diversifying the destination of its reserves.

Speaking on the sidelines of an Asian central bankers' meeting earlier this month in Malaysia, Zhou asked: "is it time for China to consider using the reserves somewhere else, instead of concentrating too much on the United States?"

That could be a hint that China will shift the use of its reserves to put more into developing countries and emerging markets. These countries offer growth potential, richer resources and lower labor costs but they need funds for development, analysts said.